We are 30 years away from 2050, but it may as well be 30 seconds to midnight, atmospherically speaking. That is the deadline, we are told, for drastically transforming our world into one that is “net zero” carbon, and so avoiding the worst impacts of climate change. But how will lofty goals be achieved in practice? Net zero plans can be as ambitious as you like, but they will struggle to be widely adopted if they don’t make money or they lack functionality. Meanwhile, the inherent short-termism of financial markets – which will need to drive a multitrillion-dollar investment in low-carbon infrastructure – seems at odds with a three-decade plan offering few immediate paydays.

No one single initiative – public or private – will pave the way for a net zero future. But what is emerging is a complex web of interactions, involving financial institutions, big tech, city governments and grassroots pressure. This is beginning to show how transformational change might come about, even in the most intransigent of sectors.

To date, 188 states and the European Union – representing 97% of global carbon emissions – have ratified the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC). The science behind this is clear: to substantially avoid the worst risks and impacts posed by climate change, we need to “keep the increase in global average temperature to well below 2°C above pre-industrial levels”. That is, we need to maintain a “net zero” balance between human-made carbon emissions and carbon removals – at a minimum.

National commitments may lay the groundwork for the transition towards a low-carbon global economy, but it’s only part of the puzzle. The path towards net zero will increasingly be driven at the local level – which makes sense when you consider that cities account for more than 70% of carbon emissions. Not only are city governments and local authorities responsible for planning strategies, they also have closer relationships with local businesses, institutions and citizens than national governments, allowing policies to be implemented quicker and more decisively.

“Delivering net zero may well be the agenda through which local government regains its purpose as an agent of change,” says Barny Evans, head of sustainable places, energy and waste at WSP in London. “They’re suddenly in the driving seat of one of the most progressive and complex transformational agendas of our time.”

Many cities around the world have set net zero commitments and implemented pragmatic policies. In February, London mayor Sadiq Khan pledged to spend £50m on a “green new deal” that would accelerate the zero-carbon plan by a whole two decades. The city is now committed to being net zero by 2030, through practical measures including low-carbon fuel-switching, ultra-low emission zones for vehicles, zero-carbon requirements for new buildings and retrofits for existing buildings.

Sydney similarly has moved its net zero target from 2050 to 2040, while Copenhagen aims to be the first city in the world to be net carbon-neutral by 2025. And it isn’t just major cities setting ambitious targets. In the UK, places like Bristol, Oxford, Nottingham and Leeds have committed to becoming net zero by 2030.

However, there often remains a huge gap between cities’ goals and the costs associated with achieving them. Local authorities will increasingly rely on partnerships with private companies to meet their targets – and this can bring a whole new set of challenges.

The plan for a climate-positive neighbourhood along the Toronto waterfront is a perfect example. Sidewalk Toronto – a partnership between Sidewalk Labs (part of Google’s parent company Alphabet) and Waterfront Toronto, the organization representing the city, provincial and federal governments – may have developed the technical capabilities to fulfil its zero-carbon vision, but the so-called “city of the future” development faced sustained community pushback and significant political hurdles from the beginning. Despite years of extensive community outreach and engagement, the project folded under intense public pressure.

Public pressure works in the other direction, too. People increasingly understand how their everyday actions impact climate and the wider environment. What they’re looking for now, says Karol Gobczynski, head of climate & energy with Ingka Group (owner and operator of 381 IKEA stores), are the “enablers” – the companies that will help them reduce their climate impact through advice, easy solutions and new technologies.

IKEA is committed to become “climate positive” – meaning it will reduce more greenhouse gas emissions than its entire value chain creates – by 2030. “Based on our Climate Action Research we found that 8 out of 10 people understand the human impact on the climate challenge and are willing to do their part,” says Gobczynski. “Plus, they are expecting businesses and government to enable them to act.”

Customers want companies to provide them with solutions that not only reduce climate impact, but a personal benefit as well, whether it be cost savings, health benefits, or just making life easier and more comfortable. “If we don't address people’s needs then there will be other companies that will,” says Gobczynski. “It’s the companies that are enabling customers to pursue this type of ‘guilt-free living’ that will win the race in the 21^st century.”

To deliver on their promises, authorities need support not just from local communities and businesses, but from the wider financial sector as well. Global demand for new infrastructure is estimated to exceed US$90 trillion between 2015 and 2030, nearly double the estimated value of what we already have. The pace at which ageing, carbon-intensive assets are replaced with greener alternatives depends on financial institutions making low-carbon investments, and supporting their clients to do the same.

This increased demand for investment coincides with a growing recognition by investors of the importance of high-quality environmental, social and governance (ESG) information in managing risk and return. Some central banks, like the Bank of England and the European Central Bank, are already addressing climate risk in a structured way. In other countries, however, the financial and physical risks associated with the climate crisis have not been taken seriously enough – and investors have taken notice.

In the US, more than three dozen pension plans, fund managers and other institutions, representing almost US$1 trillion in assets, demanded that the Federal Reserve, the Securities and Exchange Commission and other agencies do more to ensure mandatory and consistent disclosure of climate-related risks. If not, investors worry, the effects of climate change will ricochet through the economy, causing sudden falls in stock prices. By requiring companies to disclose more ESG information – about carbon emissions or their assets’ vulnerability to rising seas, for example – investors could make better decisions and push them to lower their emissions to avoid losing access to funding or affordable insurance.

Many investors, asset owners and companies are already voluntarily disclosing climate risks, guided by frameworks such as the Taskforce for Climate-Related Financial Disclosures (TCFD). “The financial institutions understand the need for climate risk assessments because they have been exposed to it through things like the TCFD,” says Michael Mondshine, director of sustainability, energy and climate change at WSP in Washington DC. “They have made quite a bit of progress, too.” He points to global investment management firm BlackRock, the world's largest asset manager, which set a precedent in 2019 when it sent a letter to shareholders outlining how sustainability would become its “new standard for investing”, with ESG risk analysis at the heart of its plan.

BlackRock hasn’t committed to decarbonizing its own operations, but it is creating the incentives for many other companies to. And this will ultimately have a much bigger impact, says Jonathan Burnston, managing partner at Karbone, a financial services firm that specializes in energy markets. “If BlackRock says they're only going to invest in companies and funds that are ESG-oriented, then companies and funds will make the necessary adjustments to try and meet those criteria.” The hope, Burnston says, is that this type of non-regulatory incentive imposed by the financial sector will reverberate out into the economy.

This type of strategy has shown promise. Many funds with ESG criteria have outperformed the broader market this year. But this isn’t to say that integrating ESG criteria into investments is an easy sell. “Most investors want to have their cake and eat it too,” says Burnston. “They want to have clean energy investments, for example, but they also want to hit a certain returns threshold – and these priorities don't always align.”

There’s a growing realization that there's an additional cost associated with ESG-oriented investments, and someone has to pay for it. “You just can't necessarily expect the same return on investment using a strategy that has ESG prerequisites versus one that doesn't,” says Burnston. “Your company’s market growth could be improved because these criteria will become regulatory requirements at some point in the future. But for now, the reality is that it may affect profitability.”

Such short-termism is clearly an obstacle on the path to net zero. But it’s not necessarily integral to the world of finance – at least according to the proponents of a concept known as climate-aligned finance. This essentially harnesses an unlikely blend of corporate muscle and collective action to bring financial portfolios into line with the Paris Agreement. Through sheer weight of signatories among major investors and carbon-intensive industries, the aim is to create a robust level playing field for clean energy investments. For example, the newly established Center for Climate-Aligned Finance, spearheaded by the Colorado-based non-profit sustainability research organization Rocky Mountain Institute, connects some of the world’s largest financial institutions with corporate clients, industry and policymakers to establish new rules of sector-specific engagement.

Ultimately, the success of climate-aligned frameworks hinges on the rise of ESG data. “In the UK, all large companies now need to report their carbon emissions alongside their financial data,” says Robbie Epsom, associate director within sustainability advisory services at WSP in London. “This means that carbon data will eventually be as high-quality as the financial data that gets reported because it is increasingly being audited. And once carbon data becomes as transparent and trustworthy as financial data, then it will likely be taxed. We are moving towards a ‘polluter pays’ market, where the taxes in society will shift towards the things that do damage, like carbon emissions.” When that happens, corporations with big carbon footprints will be exposed to the financial risk of having to pay large sums of money for their emissions.

The move towards a polluter-pays market is currently most visible in the public sector. In Canada, for example, in order to qualify for green stimulus funding as part of the COVID-19 economic recovery, large companies must commit to publishing annual climate-related disclosure reports consistent with the TCFD, and demonstrate how future operations will support national climate and sustainability goals, including achieving net zero emissions by 2050.

But it’s in the private sector, with its ability to enact change much quicker than governments, that the effects of climate-aligned finance and ESG disclosure will really count. “The decisions made by the C-suite at a multinational firm have the ability to make a global impact,” says Epsom. He has been working on the sustainability strategy for one of the world’s largest real estate investment management firms. “If you consolidated all their physical assets of real estate and infrastructure, it would be equivalent to a city larger than London,” Epsom continues. “This is huge. It means that decisions made by a small group of executives are like enacting policy for a city bigger than London – without the associated politics, and across international borders.”

The drivers towards net zero are not just financial – they’re technological too. A drastic reduction in atmospheric carbon cannot be achieved simply by reducing emissions; it will ultimately require the active removal of carbon from the atmosphere. There’s just one problem: the world doesn’t currently have the carbon capture, storage and sequestration technologies that will ultimately be needed to get to net zero.

A company that is leveraging its influence in this area is Microsoft, which is aiming not only to be “carbon negative” by 2030 (removing more carbon from the atmosphere than it emits), but also to remove all of its “legacy emissions” by 2050 – that is, all of the carbon the company has emitted since its foundation in 1975. The carbon-negative strategy necessarily involves carbon offsets – a topic that we will explore in a later article – but what’s unique about Microsoft’s approach is that it focuses on offset projects that actively remove carbon from the atmosphere, rather than those that merely avoid emissions. As such, it has set up a US$1 billion fund to accelerate the development of these technologies.

While Microsoft understandably wants to gain a competitive advantage in this area, it also has a vested interest in helping these products to mature and become more widely available. In the end, without these technologies on the market, the global effort towards net zero will stall, resulting in climate impacts that will hurt its bottom line.

Partner up

These examples of governmental, corporate and industry leadership demonstrate how the net zero agenda will be propelled not by go-it-alone solutions, but through collaboration across sectors and at multiple scales.

Buildings are a perfect example. "We need to get all new buildings built to net zero by 2030 if we want to have a shot at meaningful decarbonization,” says Fin MacDonald, manager of the Zero Carbon Buildings Program with Canada Green Building Council (CaGBC). “To do that, we need to be designing all of our new buildings to be net zero by 2025. This means that your next project should be evaluating the feasibility of achieving net zero – no question about it."

But building design teams don’t exist in isolation. It’s much more likely that building projects will pursue net zero if the right policies and market signals are in place. Voluntary certification schemes – such as the Zero Carbon Building Program and LEED Zero – along with proper local building codes and planning policies, can incentivize building owners to pursue net zero building practices on their next project.

The World Green Building Council’s (WorldGBC) Net Zero Carbon Buildings Commitment is intended to help spur these codes and policies. It supports businesses, cities, even whole regions to develop plans to reach net zero operations in their own portfolios by 2030, and to advocate for all buildings to be net zero in operation by 2050. The commitment has so far garnered signatories from nearly 100 entities, from architect Foster + Partners to the state of California.

And if it seems that the plethora of initiatives and frameworks adds yet more complexity to an already complicated field, the UNFCCC’s new Race to Zero campaign brings welcome clarity by aggregating net zero commitments and providing comparability between them. In this way, the “starting line” for organizations on the race to net zero is standardized. To date, some 996 businesses, 458 cities, 24 regions, 38 investors and 505 universities have joined the campaign, representing over 25% of global carbon emissions.

It isn’t just a blind fixation on carbon that’s driving the net zero agenda forward. Additional benefits abound. “One of the biggest benefits of a zero-carbon building,” says the CaGBC’s MacDonald, “is that you're getting a building that is future-proof. It’s one that likely won’t need a costly retrofit in the future, it’s protected from the rising cost of carbon, and it has a more robust building enclosure and building services which are more resilient to climate change.” It will also reinforce its value over time through better comfort and user satisfaction, higher lease rates and energy cost savings.

Many other indirect benefits are offered by net zero organizations and infrastructure, from improved air quality to increasing biodiversity and providing better options for mobility and housing. This broader perspective is vital to justifying the transition to net zero. (Future articles in this series will explore synergies between the pursuit of net zero and other environmental and social priorities.)

The net zero challenge is big, but the potential rewards are greater. In dealing with the climate crisis – and the post-COVID recovery – we have the opportunity to deliver a “better normal”, grow a more prosperous and sustainable economy for the long-term, and improve the quality of life for more people in more places.